The App Store Tax
The courts in the US have upheld the App Store model arguing that it demonstrates pro-competitive features that outweigh concerns of monopolistic activity. All it does is prevent operators of these stores from putting in place measures that ensure that all in-app transactions be routed exclusively through the App Store so the fees can be deducted at source.
This article was first published in The Mint. You can read the original at this link.
When the creators of Pac-Man thought of porting their blockbuster video game out of the arcade where it was born and into the fast-growing home video-game market, their first choice was to get it onto Nintendo’s Home Entertainment System (NES). Since this was the first time Nintendo (or, for that matter, any console manufacturer) was allowing another developer to distribute a game on its platform, no one had a clue of how to go about it.
Back then, NES games were distributed through proprietary console cartridges that only Nintendo could manufacture. In order to get Pac-Man onto the NES, someone had port the game to NES-compatible cartridges. Nintendo eventually agreed to make these cartridges for a 20% manufacturing fee over and above the 10% platform-licensing commission it was already charging. According to Bloomberg correspondent Takashi Mochizuki, this is the origin story behind the 30% digital distribution fee that game developers pay gaming platforms to this day.
The App Store “Tax”
This, arguably, was also the reason why, when Steve Jobs launched the world’s first mobile app store, he set developer commissions at 30%. In an interview scant months of the launch of the Apple App Store, he made it clear that even with that 30% commission he did not expect it to make money — positioning the store as a value-add that would help Apple sell more iPhones:
“It costs money to run it. Those free apps cost money to store and to deliver wirelessly. The paid apps cost money, too. They have to pay for some of the free apps. We don’t expect this to be a big profit generator. We expect it to add value to the iPhone. We’ll sell more iPhones because of it.”
And yet, despite the fact that App Store commissions are no different from what developers have been paying gaming platforms for decades, it has become the source of much angst that app developers on both major mobile platforms have done all they could to avoid paying it.
Over the years various law suits have been filed against these platforms in courts around the world but last week, in the judgement pronounced in what is perhaps the most significant of these lawsuits — Epic Games vs. Apple Inc. — Apple was restrained from requiring in-app purchases to be processed only through its App Store.
Within hours of news of the judgement reaching India, I found myself in an impromptu Twitter Space filled with jubilant Indian chief executives, developers and journalists celebrating that victory as if it was their own. Most of those present were fighting their own battles against platform giants and, what they referred to, as their efforts to “suck the oxygen out of the Indian tech ecosystem".
To them, it looked like the case had been well and truly decided in favour of developers, which could, as a result, finally rid themselves of what has pejoratively come to be known as the “App Store tax" on in-app payments. They sounded convinced that what applied to the Apple’s App Store in the US would extend to Google Play Store in India, and that Indian courts would, sooner or later, also allow alternate in-app payment (IAP) mechanisms.
Reading Between the Lines
But when I actually sat down and read the 185-page judgement in its entirety, it was clear that much of the initial excitement over the judgment was misplaced. This was not the slam-dunk victory that everyone seemed to think it was. Quite the contrary.
Instead of declaring the App Store and its restrictions on third-party payment solutions to be anticompetitive, the court had, instead, upheld the centralized solution offered by the App Store, pointing out that:
“the use of different payment solutions for each app may reduce the quality of the experience for some consumers by denying users the centralized option of managing a single account through IAP."
Not only did the court not think the App Store model was monopolistic, it said that it demonstrated pro-competitive features of security, intra-brand competitiveness and protection of intellectual property investments, whose benefits outweighed the plaintiff’s concerns.
The court also specifically pointed out that the provision of apps over Apple’s iOS platform constituted a use of Apple’s intellectual property, for which it was legitimately entitled to compensation. Furthermore, the court felt that the plaintiff had failed to show that there were alternatives “virtually as effective" as the current distribution model that could be implemented “without significantly increased cost."
Equitable Relief
At the end of the day, the only ground on which the US court held against Apple was made out under California’s Unfair Competition Law (UCL), a state legislation whose broad language made it possible for the court to recognize even “incipient" violations of the “policy or spirit" of antitrust laws — in a manner that was not possible under the US federal antitrust law, the Sherman Act.
In order to even qualify for a remedy under the UCL, Epic had to demonstrate that it was not a “competitor” but a “consumer” of Apple’s App Store. This was easier said than done considering that the reason for bringing the law suit was the fact that Epic wanted to open a store of its own and do so without paying Apple a commission for the games it sold through it. The court, however, accepted Epic’s argument that it was a “business customer” of Apple’s App Store and accepted that it had suffered economic injury because it was unable to distribute its games directly to its consumers at lower cost.
By creating this new “quasi-consumer” category, the court went on to apply the equitable provisions of the UCL to the case, and declare that the prohibition on including “buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase" threatened “an incipient violation of an antitrust law", which, while not unlawful, was unfair.
Implications
Reading between the lines, this is not the victory that it appeared to be at first glance. By declaring that Apple was entitled to compensation from developers that developed apps for the iOS platform, the court has allowed it to continue to charge for in-app purchases. As the judge has not struck down the 30% commission as being too high, Apple can continue to charge the same amount as commission going forward. All that Apple has been prevented from doing is having measures in place to ensure that all in-app transactions are routed exclusively through its App Store so that commissions can be deducted at source.
It is, however, unlikely that the mobile platforms are going to go down that path. They are both more acutely aware than ever before, of the extent of their developers’ concerns and have indicated a willingness to climb down from their original positions.
I hope this results in better outcomes all around.
